1. One of the major revenue-producing items manufactured by Ajou Corporation is a smartphone. Ajou Corporation currently...

1. One of the major revenue-producing items manufactured by Ajou Corporation is a smartphone. Ajou Corporation currently has one smartphone model on the market, and sales have been excellent. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with new models. Ajou Corporation spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone.The new smartphone project has a five-year life. Ajou Corporation can manufacture the new smartphones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smartphone will be $535. The necessary equipment can be purchased for $45 million. The equipment has a five-year life and will be depreciated to zero on a straight-line basis over that period. It is believed the market value of the equipment in five years will be $6.5 million. As previously stated, Ajou Corporation currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Ajou Corporation does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Ajou Corporation does introduce the new smartphone, sales of the existing smartphone will fall by $30,000 units per year, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Ajou Corporation has a 21% corporate tax rate and the required rate of return is 12%. Determine whether the corporation should accept or reject the new smartphone project, based on the NPV rule.

Expert Solution

Research and development and market study are sunk cost and are not included in calculation.

as NPV is positive. it is recommended to invest in the new Smartphone.

jeff jeffy answered 4 months ago

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